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Conceptual Framework For Financial Reporting (5427) : Theory of Accounts - 1
Conceptual Framework For Financial Reporting (5427) : Theory of Accounts - 1
IMPLICIT assumptions:
1. Accounting entity
2. Time period
Neutral - unbiased
Completeness - financial reports should include all information necessary for a
user to understand the phenomenon being depicted including all nec-
essary description and explanation
Prudence - inclusion of a degree of caution in the exercise of judgment need-
ed in making estimates under conditions of uncertainty such that as-
sets and income are not overstated, or liabilities and expenses are not
understated
Comparability - information exhibits when two different entities has been pre-
pared and presented in a similar manner
Reliability - users are assumed to have a reasonable knowledge of business
and economic activities and a willingness to study the information with
reasonable diligence
Theory of Accounts | 3
Understandable - information are classified, characterized and presented
clearly and concisely
Verifiability - high degree of consensus can be secured among independent
measures using the same measurement method
Timeliness - having information available to decision-makers in time to be
able of influencing their decisions
Rule of offsetting:
a. An entity shall not offset assets and liabilities, and income and ex-
penses, unless required or permitted by PFRS
b. Gains and losses on disposal of noncurrent assets are reported by de-
ducting from the proceeds on disposal the carrying amount of the as-
set and related selling expenses
c. Gains and losses arising from a group of similar transactions are re-
ported on a net basis, for example, foreign exchange gains and losses
arising from financial instruments held for trading
EVENTS after the end of the reporting period are events, favorable and unfa-
vorable, that occur between the end of the reporting period and the
date when the financial statements are authorized for issue.
ADJUSTING events are those that provide evidence of conditions that existed
at the end of the reporting period.
FINANCIAL statements are said to be authorized for issue when the manage-
ment (board of directors) reviews the financial statements and author-
izes them for issue.
FOR the sale of a noncurrent asset held for sale to be highly probable:
1. Management must be committed to a plan to sell the asset
2. An active program to locate a buyer and complete the plan must have
been initiated
3. The asset must be actively marketed for sale at a reasonable price in
relation to its current fair value
4. The sale should be expected to qualify for recognition as a completed
sale within one year from the date of classification of the asset as
“held for sale”
5. It is unlikely that the sale will be withdrawn
AN ENTITY shall recognize any subsequent increase in fair value less cost to
sell of a noncurrent asset or disposal group classified as held for sale
Theory of Accounts | 8
as gain to be included in profit or loss but not in excess of the cumula-
tive impairment loss previously recognized
THE total external revenue of all reportable segments is 75% or more of the
entity’s external revenue.
CASH EQUIVALENTS – short term and highly liquid investments that are read-
ily convertible into cash and so near their maturity that they represent
insignificant risk of changes in value because of changes in interest
rate.
BANK overdrafts, as a rule, if material should be reported as a current liabil-
ity. Exception:
1. 2/more accounts in the same bank
2. 2/more accounts in different banks, overdraft if immaterial
TRADE RECEIVABLES are classified as current assets when they are reasona-
bly expected to be collected within one year or within the normal op-
erating cycle whichever is longer.
NONTRADE RECEIVABLES are classified as current assets only if they are rea-
sonably expected to be realized in cash within one year the length of
the operating cycle notwithstanding.
PAS 2 – INVENTORY
(5442)
INVENTORIES – assets held for sale in the ordinary course of business, in the
process of production for such sale, or in the form of materials or sup-
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plies to be consumed in the production process or in the rendering of
services.
FOB Shipping point – FAS (Free Alongside), CIF (Cost, Insurance and Freight),
ex-ship
BIOLOGICAL ASSETS – both living animals and living plants; they are to be
measured at fair value less cost to sell
AGRICULTURAL ACTIVITY – is the management by an entity or the biological
transformation and harvest of biological asset for sale or for conver-
sion into agricultural produce or additional biological asset
AGRICULTURAL PRODUCE – harvested product of an entity’s biological asset
and measured at fair value less cost to sell at the point of harvest
Cost to sell – commissions to brokers and dealers, levies by regulatory
agencies, transfer taxes and duties
Characteristics of a derivative:
1. The value changes in response to the change in a specified underlying
2. It requires no initial investment or an initial small investment
3. It is settled at a future date
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FORWARD contract – an agreement between two parties to exchange a speci-
fied amount of commodity, security or foreign currency at a specified
date in the future with the price or exchange rate being set now.
FUTURE contract – a contract traded on a n exchange that allows an entity to
buy a specified commodity or a financial security at a specified price
on a specified date
OPTION – contract giving the owner the right but not the obligation to buy or
sell an asset at a specified price any time during a specified period in
the future
EMBEDDED derivative – a component of a hybrid instrument that also in-
cludes a non-derivative host contract
WHEN the entity uses the COST model, transfer between investment property,
owner-occupied property and inventory shall be accounted for at car-
rying amount.
PROPERTY, PLANT AND EQUIPMENT – tangible assets held for use in produc-
tion or supply of goods or services, for rental to others, or for adminis-
trative purposes and expected to be used during more than one re-
porting period
Recognition:
Entity will comply with the conditions attaching to them
The grants will be received
Should be recognized as income over the period as the relevant ex-
pense on a systematic and rational basis
BORROWING COSTS – interest and other costs that an entity incurs in con-
nection with borrowing of funds
QUALIFYING ASSETS for capitalizing interest cost:
Investment property
Manufacturing plant
Power generation facility
Intangible asset
IMPAIRMENT LOSS – carrying amount or cash generating unit exceeds its re-
coverable amount
RECOVERABLE amount – higher between fair value less cost to sell and value
in use
VALUE in use – present value of estimated future cash flows expected to arise
from continuing use of an asset and from its ultimate disposal
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CASH GENERATING UNIT – smallest identifiable group of assets that generate
cash inflows from continuing use that are largely independent of the
cash inflows from other assets or group of assets
CORPORATE ASSETS – other than goodwill that contribute to the future cash
flows of both the cash generating unit under review, and other cash
generating units; i.e. headquarters building, EDP equipment and re-
search center
Identifiable when:
It is separable – capable of being separated from the entity and
sold transferred, licensed, rented or exchanged regardless of
whether the entity intends to do so.
It arises from contractual or other legal rights, regardless of
whether those rights, are transferable or separable from the entity
or from other rights and obligations
The RESIDUAL value of an intangible asset with a finite life shall be as-
sumed zero, unless:
There is a commitment by a third party to purchase the asset at
the end of its useful life
There is an active market for the asset and residual value can be
determined by reference to that market and it is probable that such
market will exist at the end of the asset’s useful life
CURRENT LIABILITIES:
Expected to be settled within the normal operating cycle
Due to be settled within one year
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Incurred for trading
No unconditional right to defer settlement
CONTINGENT LIABILITY:
Possible obligation arising from past events that will be confirmed only
by the occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the entity.
Present obligation that arises from past events and is not recognized
because it is not probable that an outflow of resources will be required
to settle the obligation or the obligation cannot be measured reliably.
PERPETUAL DEBT INSTRUMENT – provide the holder with the contractual right
to receive payments on account of interest at fixed dates extending in-
to the definite future, either with a right or no right to a return of prin-
cipal.
PAS 17 – LEASES
(5465)
FINANCE LEASE – contract that transfers substantially all the risks and re-
wards incidental to ownership of an asset, although title may or may
not eventually be transferred